Wednesday, October 17, 2007

Are you ready to outsource, a reality check

Source :

Outsourcing some or all of your companys IT functions can jumpstart your business, push it to the next level or just get your systems under control. But for outsourcing to work, youll have to manage it carefully. Read the eight signs below before taking the plunge.

You havent done duediligence on potential vendors.

Thats what got Erin Hurry, founder of Girls with Goals, into trouble. She worked with a series of outsourcers to develop her companys Web site. I took peoples word. The first company we worked with said they had worked for Ford Motor and Bacardi, but I never called those companies to ask how it worked out, she says. And it turned out that company had been sued by previous clients.

Hurry cautions that you should ask about whether the vendor you contract with will be outsourcing the work to another party and if so, you want the details on that third party. That includes background checks on the employees who will actually be doing the work for you, and what the companys turnover rate is, especially in a market like India where jobjumping is the norm.

They have a huge application developer turnover rate in India, so one person starts the code, then goes missing, and then someone else starts again and the whole project is mess, Hurry says. Then they want to come back at you to get more money. You have to be very careful, and ask questions. Do your research and have a contingency plan.

MyWeather president Kevin Baird has seen a bad outsourcing choice affect one of the partner companies he deals with, because it chose an outsourcing provider without having a good understanding of how that provider was investing in its own resources. Their business, their ability to grow and deploy new elements inside their business, has been significantly hampered by a partner who simply doesnt have the bandwidth to provide them with the people and resources they need, regardless of how much money they would spend, he says. That has cost them time to market. Now theyre going away from that partner, and it will cost additional incremental funds, because theyve got to move everything.

Fastgrowing companies dont necessarily know what their future needs will be, so they need to feel confident that the service provider will always be a step ahead.

You dont have any plans for managing the relationship on an ongoing basis.

Many IT service providers, especially the larger ones, whose business models justify a years worth of a teams work courting a US Dollar100 million deal have yet to figure out the best sales and selling models to make much smaller deals profitable. With a very high cost of sales to the small and midsize business market, one solution some have is to keep account management overhead low.

For a small company, that means that your account management team, issue escalation personnel and the guy managing your project likely will be the same person. It will be difficult to manage the outsourcing engagement and control the outsourcing engagement, says Ross Tisnovsky, VicePresident of information technology outsourcing research at Everest Research Institute. But necessary. Relationship management becomes your problem, meaning you have to manage them.

So, whether its a team, a person or half a person, someone has to take responsibility for the engagement on your end which, by the way, was a lesson learned by big companies when they first got into outsourcing a decade or more ago. Learn from the mistakes of the [big guys], when they first started doing these deals, and after they did the transaction everyone just went back to their day jobs, says Frank Casale, CEO of the Outsourcing Institute. And without oversight and governance, the result often was failure.

At MyWeather, that person charged with daytoday relationship management is its VP of technology development. You have to have someone who can manage that part of your business, and depending on how big you are, that person also might be doing other things, says Baird.

You dont have your own house in order.

IT is broken at your company and youre hoping an outsourcer will come on board and make everything all better. Wrong. Now youll just get to pay someone else to run your flawed or illdefined processes and inefficient systems You want to avoid what we call the Your mess for less scenario, where your IT dept is in a total sense of chaos and you just hand it off and expect them to fix it, says Casale. Those scenarios dont play out well.

Same thing with business processes. Very few companies actually understand what they do. They cant define it or lock it down, says Vic Berger, manager of business development at CDW, seller of computing products. To understand processes before you outsource them, give individuals a legal pad and have them write down everything they do each day for a week. It starts giving you a better picture of where work flow is going, says Berger, and what applications you may not even have accounted for that are pretty well used. Then you can better see what has a potential for outsourcing.

You cant compromise on customisation.

For very small infrastructurerelated projects, suppliers generally cannot provide any kind of customisation, Tisnovsky says. Forget about running email your way youll have to follow the suppliers route to running Microsoft Exchange. They provide highly standardised managed services its the only way they can do it for scale, he says. You have to be willing to change your processes and the way your end users work. You will use absolutely standard email and scheduling.

You cant wait literally to get to market.

Startups that need to get their applications developed so they can get to market fast may benefit from an outsourcing or offshoring relationship, but theyll have to choose carefully. Working with a company that is CMM 5 [a processimprovement methodology], and has wonderful procedures, will become virtually impossible, because CMM 5 requires significant overhead, documentation overhead, spec changes everything is a process under CMM. If your concern is time to market, you dont want that, says Tisnovsky.

Instead, if youre going to outsource or offshore, you need to partner with a company that will give you direct collaboration with the developers over process maturity. That kind of relationship is more likely to be available from a much smaller Tier 2 offshore provider thats hungrier for the business, he says.

Your organisational culture is more about confrontation than collaboration.

Even the smoothest outsourcing relationship is going to have a problem now and then. Some companies always will take the view that its the vendors fault, and either they fix things or theyre gone, rather than work together to figure out how both sides can address the issue.

Companies that take the former approach may be better off not outsourcing at all, because theres no cheap and easy end to the relationship. Outsourcing costs time and money and commitment to get involved in, so its expensive and painful to get out of, Casale says.

You wont be ready to move forward aggressively on your plans.

You cant just plan for outsourcing youve got to be ready to move forward fast, with an aggressive time line that lets your company realize its stated intentions and keeps them from moving to the backburner. The hangtime creates morale issues, says Casale. Cost and risk goes up and your A players are the first to leave if theres uncertainty.

Your expectations about cost savings are unrealistic.

Of course, outsourcing is about saving money, but not necessarily right away. For one thing, suppliers may not be able to price their services as aggressively for smaller contracts as they do for bigger deals. For another, the process of delivering IT and recovering its costs is somewhat informal in some organisations, including large companies, Forrester Research principal analyst Bill Martorelli says. When organisations dont know what their true IT cost base is to start with, they can be in for a shock when a price tag is attached to those services.
Its not wrong to make cost savings a prime consideration 90 percent of the outsourcing deals still being made are about just that, says Casale. But, he says, if your focus and objective of outsourcing are limited to shortterm tactical benefits like expense reductions, so, too, will your benefits be limited to shortterm and tactical. If youre willing to have a grand revision and think of the upside, both longterm and strategic, then you have a wonderful opportunity.
Translation: Conversations with your outsourcer should be about issues such as increasing response time for clients, which boosts your business, rather than about how to save 20 percent on overhead costs.

For Baird, its all about understanding the costs up and down the line, rather than taking a narrow view. You never will convince any business person worth his salt that cost savings shouldnt be up there, he says. But, competitively, the ability to win is determined by your ability to stay ahead. I think its impossible to stay ahead unless you can afford to have multiple experts and expertise in all the areas that a partner has experts in.

If you dont see your organisation as grappling with these issues or if you believe you can put in place the mindset, plans and policies to change perceptions and expectations, and remove roadblocks then welcome to the wonderful world of outsourcing.